How to plan for healthcare costs in retirement

When you retire, your healthcare costs don’t just disappear. In some cases, they can increase. Losing your employer-sponsored healthcare coverage and searching for federal or private insurance can be stressful. With a little planning, you can help ensure you have enough in your retirement savings to cover these expenses.

Think About Costs

Medicare is a federal health insurance option for people aged 65 or older. One common misconception is that Medicare doesn’t cost anything. There will likely be out-of-pocket expenses like co-pays, deductibles and premiums involved with Medicare. Additionally, you may need to pay for other potential costs like Medicare Supplement or other coverage. It’s important to consider these costs in your retirement savings budget. For an average 65-year-old couple, healthcare costs during retirement will consume 68% of their gross Social Security benefits, if they begin receiving Social Security at 65.¹

If you plan to retire earlier than 65, you’ll have to find another option before Medicare kicks in. This is another added expense many don’t consider. Some options include:

COBRA
Private insurance
Insurance from your spouse’s employer if they have not retired yet
Health plans from the Marketplace

What to Expect from Medicare

When you apply for your Social Security benefit and you are age 65 or older, Social Security will automatically enroll you in Original Medicare which includes Medicare Parts A and B. If you are not receiving your Social Security benefit, you will need to enroll in Medicare by accessing your online Social Security account or by calling Social Security. Original Medicare is:

Medicare Part A: Helps pay inpatient care in hospitals, skilled nursing facilities, hospices and home health care.
Medicare Part B: Helps pay doctors’ visits, preventative screenings, outpatient services and medical equipment.

Part A is typically prepaid during your working years through the U.S. federal payroll tax (FICA) and Part B has a per person, per month premium that is deducted from Social Security benefits. If you are not receiving Social Security benefits, you will pay for your Part B directly. You can choose to have additional coverage added to Original Medicare by adding a Medicare Supplement Plan (Medigap) and Medicare Part D (Prescription Drug) coverage or by choosing Medicare Part C (Medicare Advantage) Plan. These plans are offered by private insurance companies and may include additional premiums depending on the options you select. Here is a breakdown of what they offer:

Medicare Supplement (Medigap): Helps pay Medicare Part A and B out-of-pocket medical costs such as copayments, coinsurance and deductible expenses.
Medicare Part C (Medicare Advantage): Includes all benefits and services from Medicare Parts A and B with the option to add prescription drug, dental and vision coverage.
Medicare Part D: Helps pay prescription drug costs.

Long-Term Care

According to the U.S. Department of Health and Human Services, retirees have an almost 70% chance of needing long-term care.² This could mean in-home care or an assisted-living facility, which can be expensive. Long-term care insurance can help cover these costs. Long-term policies also have premiums like other insurance coverage. Retirees may be able to pay an upfront payment that could eliminate the risk of premium increases. Premiums are based on age, gender, health and more.

Using a Health Savings Account

If you have a qualified high-deductible health plan, a Health Savings Account (HSA) allows you to put aside pre-tax dollars while you are still working, to pay for eligible medical expenses. Once your account reaches a certain amount, you may be able to invest a portion of it in mutual funds or other investment vehicles. Although you can’t make HSA contributions past age 65 if you are enrolled in Medicare, you can use any saved funds to pay for eligible medical costs tax free. You can even use the funds for non-eligible costs, but you would have to pay income tax on the funds used.

Creating Your Plan

Health care can be a major expense in retirement and Medicare may not cover all your medical costs. Understanding how much money you need will depend on when you retire, where you’ll live and your health. It’s important to include all these potential costs in your retirement plan so you have the financial support you need.

This blog is up to date as of March 2023 and has not been updated for changes in the law, administration or current events.